If you want to borrow some money, a personal loan is a great option for many people.
These loans are normally for one to five years and aren't secured against your home or any other asset. Normally you can't borrow more than £25,000, and the best rates are offered for loans between £7,500 and £15,000.
Personal loans have three main advantages:
1. Low rates
Interest rates on personal loans are usually low – as long as you have a good credit rating. If your credit rating isn't so good, you'll either be offered a loan with a higher interest rate or no loan at all.
2. The loan isn't secured against your home
A personal loan isn't secured against your home. That means it's very hard for the lender to force a sale of your home if you fall behind on your loan repayments. It's much easier for the lender to kick you out of your home if the loan is secured.
3. Fixed interest rates
Interest rates on most personal loans are fixed. This means that the rate you pay won't change at all during the duration of your loan. That's a good thing as it gives you security and enables you to plan your finances years in advance.
On the downside, personal loans have traditionally been pretty inflexible and many loans have come with penalty fees if you wanted to pay off your loan early. Make sure you read the small print carefully and understand the terms and conditions. Don't be afraid to ask questions.
Rates are falling
The good news is that rates on the top personal loans have been falling for at least two years now. You can now get a rate as low as 5% for loans between £7,500 and £15,000.
Let's look at the top loans available right now:
|Loan||Representative APR||Representative APR||Representative APR|
|Derbyshire BS Personal Loan||5.0%||£11,292.00||£188.20|
|Clydesdale Bank Online Personal Loan||5.1%||£11,318.40||£188.64|
|Yorkshire Bank Online Personal Loan||5.1%||£11,318.40||£188.64|
|Tesco Bank Personal Loan||5.1%||£11,318.40||£188.64|
|Sainsbury's Bank Standard Nectar Cardholder Loan||5.1%||£11,318.40|
|M&S Personal Loan||5.4%||£11,397.60||£189.96|
|AA Personal Loan||5.8%|
|Co-operative Bank Personal Loan||5.8%||£11,449.80||£190.83|
Not for everyone
All of the loans in the above table offer very attractive rates but, as we've said already, it's important to remember that not everyone will be offered loans at these rates. Lenders are only obliged to offer their best rates to 51% of successful applicants.
If you have a history of borrowing money and then paying off your debts on schedule, there's a good chance that you'll be able to borrow at 5%. But if you've never borrowed money before or you've been late with repayments, you may not be able to get the best deals. It all goes back to whether you have a good credit rating or not.
It's also possible that you may be able to borrow even more cheaply than 5%.
If you have an excellent credit rating, you may be able to get a 0% new purchases credit card. With one of these cards you can make a big purchase and not pay any interest on the resulting debt for as long as 16 months. The current market leader in this category is the Tesco Clubcard Credit Card for Purchases.
Let's imagine that you want to buy some new furniture for £1,500. If you use the Tesco card for these purchases, you won't have to pay any interest for 16 months. That's as long as you make your minimum repayments each month. Just remember that you may be offered a fairly low credit limit – if you're only offered a £2,000 credit limit, you may want to go for a personal loan where you can borrow more.
Another possible alternative is to borrow from other individuals via peer-to-peer lending websites. These sites are becoming increasingly popular and part of the attraction is that you're cutting out the mainstream banks from the process. If you have an excellent credit rating you may be able to borrow for as little as 6.4% on Zopa.
Do you need to borrow?
Whatever kind of loan you go for, do ask yourself first whether you need to borrow in the first place. Even if you're paying a super-low interest rate, you're still giving up money on interest payments that you'll never see again. The prudent approach is to cut your spending and build up your savings. If you follow that approach you'll be richer in the long-run.
But if you're determined to borrow, a personal loan may well be the best option for you.
Take a look at the latest personal loan rates